Futures Trading

Futures trading means buying and selling standardised contracts on regulated exchanges to profit from price moves in stock indexes, commodities, interest rates, currencies or crypto. Futures are popular with active traders because of deep liquidity, nearly 24 hour trading, low costs and the ability to go long or short equally easily. They are also leveraged, so understanding contract size and margin is not optional.

Getting started#

1. Open a futures enabled account with a broker regulated as a futures commission merchant in the US, or the equivalent elsewhere. See Futures Commission Merchants (FCM).
2. Learn the contract specifications for anything you trade: size, tick value, hours, expiry and settlement. See Contract Specifications.
3. Start with micro contracts. Micro E-mini index futures and micro crude, gold and Bitcoin futures are a tenth or less of the full size, so position sizing is manageable on smaller accounts.

Popular futures for active traders#

A worked Micro E-mini trade#

Margin and daily settlement#

Brokers require initial margin to open a position and maintenance margin to keep it. Day trading margins at some brokers are much lower than overnight margins, which tempts traders to oversize. Gains and losses are settled into your account every day. Keep plenty of cash beyond the margin requirement. See Futures Margin: Initial and Maintenance and Mark-to-Market.

Trading hours#

Many US futures trade from Sunday evening to Friday afternoon with a one hour daily break. Liquidity is deepest during the underlying market's main session. Overnight sessions are thinner and can move sharply on global news. See Trading Sessions.

Rolling and expiry#

Each contract expires. Equity index futures roll quarterly, commodities often monthly. Volume moves to the next contract around the roll date, and you need to close or roll before expiry, especially for physically settled contracts. See Rolling Futures Contracts and First Notice Day and Last Trading Day.

Costs#

• Commissions and exchange fees per contract, per side.
• The spread, usually one tick in the most liquid contracts.
• Data fees for real time exchange data at some brokers. See Market Data Fees.

There are no borrow fees for shorting and no financing charges as such; carrying costs are built into futures prices.

Taxes in the US#

Many regulated futures contracts in the US receive Section 1256 tax treatment, where gains are taxed as 60% long term and 40% short term regardless of holding period, and positions are marked to market at year end. Rules are specific; see Trading Taxes and Capital Gains and a tax professional.

Common mistakes#

• Trading full size contracts on a small account.
• Sizing from margin rather than from the stop.
• Ignoring contract roll dates and accidentally trading an illiquid expiring contract.
• Holding through major reports like crude inventories or the jobs report without a plan.

Frequently asked questions#

How much money do you need to trade futures?#

It depends on the contract. Micro contracts can be traded with a few thousand dollars, but you should keep far more than the minimum margin to absorb normal moves.

Are futures riskier than stocks?#

They are leveraged, so the same price move creates larger gains and losses relative to your money. With proper sizing, the risk per trade can be controlled.

Can you trade futures with a small account?#

Yes, using micro contracts and strict risk rules. Full size contracts are usually too large for small accounts.

Sources#

• U.S. Commodity Futures Trading Commission, Learn and protect
• Wikipedia, Futures exchange